Master the Leap: Former IT contractors share their tips on how to transition from freelancer to founder to create passive income and financial freedom

Freelance IT contractors, the backbone of many projects, often possess a unique blend of technical prowess and entrepreneurial spirit. But what happens when these skilled soloists decide to strike out on their own and build their own empires or even just multi-million passive revenue streams?

Here we share some tips from former freelance IT contractors who went on to build successful businesses.

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The tech sector is a breeding ground for independent spirits. From niche consultancies to disruptive software startups, the freelance-to-founder path has been paved by a diverse array of talented individuals, each with their tale of grit, innovation, and, of course, a little bit of luck.

When we asked Nick Woodward, former IT contractor and founder and CEO of recruitment tech business ETZ Tech, what motivated him most to make the transition from a freelance IT contractor to a company founder, he told us: “Not having to work for someone else.”

Path to passive income

Having the freedom to work for yourself is a common response for many salaried employees when they make the switch to freelancing. But packing in the day job should never be done in haste or without preparation.

So, should IT contractors first create passive revenue streams in their spare time before launching a company with added costs such as employees?

“Yes, definitely good advice,” says Woodward. “The number one aim is to have cash rolling in without the need to be constrained by a full-time job.”

Don’t assume that everyone can be trusted. Trust has to be earned and once abused can never be regained. Your first hire should be an ethical and trustworthy lawyer.

Nick Woodward, Founder and CEO of ETZ Tech

For Dave Chaplin, CEO and founder of contracting authority ContractorCalculator and IR35 compliance firm IR35 Shield, his incentive to pivot from freelancer to founder was to generate passive income.

“I wanted to move away from the “fees-for-hours” model by creating a business that generated passive income,” he tells The Freelance Informer. “For 6 months, I worked 40 hours a week contracting, and 40 hours a week building the new business. Then I switched.”

However, he had other motivations that drove him. “I wanted to travel and operate the business from anywhere, which these days is referred to as being a digital nomad. It was 20 years ago, and the internet was relatively new, so I seized the opportunity, by upgrading my hobby contracting site I’d built in late 1999 into ContractorCalculator.co.uk.”

For 6 months, I worked 40 hours a week contracting, and 40 hours a week building the new business. Then I switched.

Dave Chaplin, CEO of IR35Shield and ContractorCalculator

After 15 years running the business using outsourced suppliers, Chaplin hired his first employee, to try and expand further. “The following year, the IR35 reforms were announced, so we leveraged the online IR35 test we’d already built and spun that out to create IR35 Shield, which has grown to eight employees,” says Chaplin.

But going from freelancer to founder will have its share of challenges such as managing time (and sleep); understanding customer needs and packaging prices competitively while still making a profit.

Then there are the nasty surprises that can happen when your side hustle starts to take off. For example, dishonest employees and suppliers could wreak havoc on your reputation or even your financial standing.

Have faith that you will resolve the unknown challenges that present themselves.

Dave Chaplin, CEO of IR35Shield

Woodward says based on his experience his most valuable advice is, “Don’t assume that everyone can be trusted. Trust has to be earned and once abused can never be regained. Your first hire should be an ethical and trustworthy lawyer.”

Chaplin says, “Building and running a business is a skill itself, which you won’t have as a contractor,” says Chaplin. “Read one business book a week for a few years, and educate yourself on topics such as sales and marketing, contract law, and tax matters. Business biographies provide excellent tutorials,” he says.

Chaplin suggests freelancers should accept the fact that they are going to learn from mistakes along the way. “Have faith that you will resolve the unknown challenges that present themselves,” he says.

He continues, “The goal of any business owner is to replace themselves with other people, so they are not needed. The best book on this topic is The E-Myth Principle by Michael Gerber. Try not to build a monster that controls you.”

Chaplin says we are moving to an “output-based market, where large firms are realising they can package up work items, rather than hire employees.”

He says contractors who are high performers can leverage the fixed-priced market to increase their earnings by bidding for outcome-based work.

“Once they have secured a number of clients, they can then look to expand themselves, to be more like a small consultancy,” he suggests.

Gaps in the market that IT contractors can fill

“Setting up a YouTube channel offering advice on your skill set is one of the best ways to fill a gap in the market,” according to Woodward. “If it’s a hot topic like AI then you should be able to build a great passive revenue stream from advertising,” he says.

Here are some examples of freelancers who set up businesses and never looked back:

• Joel Gascoigne: A freelance web developer who created Buffer, a popular social media management tool had reported revenues in 2023 of over $18 million with nearly 58,000 customers.

I started

@buffer (in 2010) while continuing my freelance web development work full-time.

I dropped my work / clients gradually as Buffer revenues grew to be enough for me to work on it full-time. It’s a totally viable way to do it, and I’d argue much more accessible for many.

@joelgascoigne

• Mike Cannon-Brookes and Scott Farquhar: Atlassian, a NASDAQ-listed multinational software company with a market cap of an enterprise value of over $60 billion at the time of writing, was co-founded by two former freelance developers. Watch Cannon-Brookes’ Ted TalkX below.
• Jason Fried and David Heinemeier Hansson: Built Basecamp, a project management software platform, while working as a freelance designer and a freelance web developer. The company now has a podcast called The Rework Podcast from 37 Signals

Secret sauce: what’s yours?

So, how do you claim your own piece of the digital kingdom?

• Find your niche: Deep expertise attracts clients and fuels innovation. Become the “Yoda” of your chosen domain, the Obi-Wan of your tech tribe. Start going back over the years and create a package of skills you could then share and commercialise.
• Solve a real problem: Don’t just offer services, offer solutions. Identify a pain point and build a bridge over it, brick by pixelated brick. Start with a problem you would like solved. Then at the very least if you solved it, you would still come out winning.
• Embrace the hustle (and all the roles you might play): Building an empire takes more than coding skills. Hone your marketing, sales, and leadership chops. You’re not just a coder, you’re a CEO in the making. That means you will wear many hats in the beginning, so delegate to fellow freelancers where possible and with those who have good references. You should probably buy a few items in bulk such as tea, coffee or whatever insane energy drink out there that won’t send you to A&E along with pre-signed greeting cards (i.e. for birthdays, Valentines’s, I’m sorry, etc.) for all those late nights you had to stay up and missed date night or family celebrations.
• Never stop learning: The tech landscape shifts like desert sands. Stay ahead of the curve, constantly honing your skills and adapting to new trends. AI, for example, is being adapted to most industries, so think about how you can meet industry-specific needs with your experience in that industry as an IT contractor (pharma, finance, gaming, accounting, recruitment, retail, etc.).

Remember, the path from freelancer to founder is paved with challenges. But for those with the vision, the grit, and a killer code, the rewards and life lessons are boundless.

Checkout our other Freelancer to Founder articles